What effect will Northern Ireland’s spend local scheme have on the economy?

The devolved government in Northern Ireland has engaged in policy experimentation to boost the post-lockdown economic recovery by giving every citizen a £100 ‘spend local’ voucher. It is worth evaluating whether this innovation is something that should be considered for the rest of the UK.

Lockdowns during the pandemic meant that many non-essential shops (as well as cafes, restaurants and hairdressers) had to shut down across the UK. Consequently, shops without an online presence lost a lot of business. Restrictions on which businesses could remain open lasted longer in Northern Ireland than in other parts of the UK, which meant that local enterprises lost more business than their peers. To stimulate spending on the high street, the Department for the Economy in Northern Ireland introduced a ‘spend local’ scheme, which gave each adult a £100 pre-paid card.

What is the spend local scheme?

Devised in late 2020, the scheme attempted to emulate what the government of the island of Jersey did in September 2020. Jersey’s government gave every adult and child a £100 pre-paid Mastercard that could only be spent in local bricks-and-mortar retailers. This included shops and retail outlets, restaurants and cafes, hotels and guesthouses, services such as car valeting and hairdressing, and to pay for sporting activities and experiences.

Islanders were encouraged to keep their cards in case the government decided to top them up in the future. Over 90% of islanders engaged with the scheme: 103,000 cards were issued and £10 million was spent in the local economy (Public Accounts Committee, 2021).

Northern Ireland’s ‘high street spend local scheme’ opened for registration on 27 September 2021, with the first cards issued in October (see Figure 1). Each person over the age of 18 was entitled to apply for a £100 card. The original deadline by which the money had to be spent was 30 November 2021, but due to demand and the logistics of issuing cards to well over 1.4 million people, the deadline was initially extended to 14 December and subsequently to 19 December.

The economy minister Gordon Lyons (whose department is responsible for the scheme) stated that ‘the purpose of the High Street Scheme is to stimulate local businesses, including retail, hospitality and service sector outlets, which had been hit hardest during the pandemic’ (Department for the Economy, 2021).

To that end, the cards cannot be used for online purchases. The cards also cannot be used for gambling and some financial and legal services. By the end of November, over £100 million had been injected into the economy through card spending (Department for the Economy, 2021). The total budget for the scheme is £145 million, which is approximately 0.7% of total public expenditure by the Northern Ireland Executive in the 2020/21 fiscal year.

Figure 1: Northern Ireland’s spend local card

Source: Northern Ireland Executive (2021)

What will determine the effect of the scheme?

The scheme’s overall effect on the local economy will be determined by how much additional expenditure it generates. This is known as its ‘additionality’.

The scale of additionality can be measured by the size of what economists call ‘the fiscal multiplier’. This is the mechanism through which government expenditure can have a greater effect than its initial value, due to indirect expenditure.

For example, buying £100 of goods in a shop not only directly pays the wages of the employees there, but those employees will also spend part of the wages they receive on other goods and services, generating further indirect expenditure in the wider economy.

Four main factors will determine the size of this fiscal multiplier, and thus the degree of additionality for Northern Ireland’s spend local scheme: what economists call substitution effects; the marginal propensity to consume; leakages; and timing.

Substitution effects may lower the fiscal multiplier. While people have each been given £100 to spend as they choose, there is no guarantee this will promote additional expenditure. Instead, consumers may use their card for purchases that they were already planning to make, and either save £100 of their own cash, or use this cash to pay off existing debts.

A high marginal propensity to consume will raise the fiscal multiplier. A person’s marginal propensity to consume measures how much of additional income they spend versus how much they save. If people spend all their card’s balance, and those who receive this as income also have a high marginal propensity to consume, then the total value generated by the scheme will be greater than the initial £145 million cash injection.

Evidence from behavioural economics suggests that people are more likely to consume financial windfalls that are properly framed as such (Epley and Gneezy, 2007). The Northern Ireland scheme is deliberately framed as a windfall to be spent.

Leakages may lower the fiscal multiplier. Northern Ireland is a very open economy: around 46% of goods and services purchased by businesses come from outside (Northern Ireland Statistics and Research Agency, NISRA, 2021). Parts of the retail sector also have high representation by UK-wide chains, including supermarkets (Kantar, 2021). Extra expenditure by consumers may therefore leak out of the local economy.

Finally, timing can raise or lower the fiscal multiplier. Retail and hospitality expenditure experiences seasonality. As research commissioned by the Department for the Economy showed, spending on shopping and going to pubs, cafes and restaurants is highest towards the end of the year, and lowest between August and October. This means that a scheme operating during this quieter time, and coinciding with the ending of other business support, would have the greatest additionality, raising the fiscal multiplier.

What’s the evidence from elsewhere?

Jersey’s spend local scheme, which took place in 2020, gives an insight into how successful the Northern Ireland scheme might be. Of the total available money in the programme, 95.5% was spent (across 359,812 transactions). The wholesale and retail sector received the biggest spend, with around 40%; followed by supermarkets, fast-food restaurants and food retail with 22%; and hotels, restaurants and bars with 16% (see Figure 2).

Figure 2: Total spend on Jersey’s spend local scheme (by Mastercard merchant category codes)

Source: States of Jersey, Public Accounts Committee (2021)

The Jersey Public Accounts Committee concluded that it was difficult to evaluate the effectiveness of the scheme, because there was a lack of data available to measure what additional expenditure was generated. The committee welcomed the apparent low levels of leakage of expenditure, as the value of the card could only be spent locally. Combined with the value of the card not being able to be saved, this would have raised the fiscal multiplier.

The committee was more critical of the high proportion of spend on food retailers, as these had already performed well during lockdown. Nearly one-quarter of the scheme’s value went to a sector where substitution effects would be high, as consumers would already be planning to make regular food purchases, with this lowering the fiscal multiplier. The committee therefore recommended that more effective ways to target the sectors most affected by the lockdown-induced downturn should be explored.

There are also international examples of similar fiscal stimulus programmes during the pandemic. In Japan, individuals received a cash transfer worth approximately $950 (£720), which saw increased spending relative to the same time the previous year (Kubota et al, 2021). The effect was largest for households with outgoings that were greater than their normal monthly income, indicating that those liquidity-constrained households had a higher marginal propensity to consume.

Similar stimulus payments were made in the United States. Around 40% was spent as intended by households, but most of the money was either saved or used to pay off debt (Coibion et al, 2020). Again, low-income and low-liquidity households saw the greatest increase in spending, but overall the programme failed to stimulate aggregate spending in the economy (Baker et al, 2020).

Should other parts of the UK implement the scheme?

We will not know the full impact of the Northern Ireland spend local scheme until after it finishes on 19 December 2021. Initial evidence for the level of retail footfall shows that Northern Ireland performed better than other UK regions during November, which may reflect the effect of the policy.

The Resolution Foundation has also supported this type of voucher scheme, as it achieves a better balance between the need to stimulate the high street while mitigating the spread of coronavirus (unlike the UK government’s time-limited ‘Eat Out to Help Out’ scheme in the summer of 2020). If other parts of the UK are to implement the spend local scheme, then there are four valuable lessons from what has happened in Jersey and what is happening in Northern Ireland.

First, timing matters. The positive effects of the Northern Ireland scheme may not have been maximised due to its continuation through until mid-December. The research commissioned by the Department for the Economy recommended that the scheme should have ended before Black Friday events started in late November. In contrast, Jersey’s scheme was completed by the end of October 2020.

The delays in launching and implementing the Northern Ireland scheme will therefore have reduced the programme’s additionality. As the scheme has coincided with rising fuel and food prices, the substitution effect may also have been greater than if the scheme had been launched earlier, as individuals use their card to cover day-to-day expenditure on essentials.

Second, the spend local schemes should have been more targeted. As the data from Jersey show, nearly one-quarter of the spend in its scheme went to grocery retailers and fast-food outlets, which had already benefitted from an increased flow of business during (and because of) lockdown. Expenditure on groceries will have a larger substitution effect, as this is regular and planned expenditure, which in turn will lower the fiscal multiplier.

Third, there is evidence that a transfer targeted at disadvantaged households provides a stronger boost to overall spending (Andreolli and Surico, 2021). In Jersey, islanders on income support and selected pensioners received a further £100 paid directly into their bank account, to help to stimulate the economy. Perhaps the Northern Ireland scheme could have replicated this targeting of those who are least well-off, thus raising the fiscal multiplier of the public expenditure.

Finally, there is the question of what the opportunity cost of the spend local scheme is. For example, the money spent on the spend local scheme could instead have been used to maintain the £20 uplift in universal credit in Northern Ireland for one year (Magill, 2021).

This reinforces the important point that public expenditure decisions are not taken in isolation. The marginal benefit of each pound spent needs to be weighed against other potential uses, particularly when there are severe pressures on the Northern Ireland Executive’s budget, including the longest NHS waiting lists in the UK.

Where can I find out more?

The impact of Covid-19 on Northern Ireland business activity: Karen Bonner, Eoin Magennis and Anastasia Desmond examine how Covid-19 affected businesses in Northern Ireland.
Don’t look a gift card in the mouth: Richard Ramsey on the voucher scheme in Northern Ireland.
COVID-19 response: Spend Local Scheme: States of Jersey Public Accounts Committee Report on the island’s spend local scheme.